Best personal loans for bad credit 2022
As you can see, a score between 300 and 579 is considered bad. This tells lenders that you have had trouble paying your bills in the past and may not be on solid financial footing.
What is this score based on?
For a score that plays such an important role in our lives – including everything from the interest rate we’ll pay on a loan to our qualification for a particular job – many of us don’t fully understand what’s going on in our credit scores, or even how our FICO® score is calculated.
It can help to think of your FICO® score as a cake cut into five pieces. But the five pieces are not all the same size. Some weigh more than others. Here’s how each piece plays into your credit score:
Payment history (35%)
The biggest piece of the credit pie is payment history. Each month, your creditors report to the “big three” credit reporting agencies: TransUnion, Equifax and Experian. They let reporting agencies know if you’ve paid your debt on time and in full. If your payment is late or you completely miss paying, they report it to the reporting agencies.
Each time you make a payment on time and in full, the cake’s payment history benefits. Every time you’re late or don’t make any payments, this coin takes a hit.
Amounts due (30%)
A slightly smaller slice of the pie is called the “amount owed”. When you apply for a new loan, creditors want to make sure you aren’t overstretched already. Let’s say you have a credit card with a spending limit of $10,000. The less you owe on this card, the better. Creditors like to know you have access to credit, but be careful how you use it.
Length of credit history (15%)
Simply put, the longer you’ve had credit and been paying bills, the more likely a creditor will feel good about your ability to handle new debt.
Composition of credit (10%)
Another thing creditors want to know is that you can handle all types of debt. Suppose you have three automatic payments, but no other credit on your file. It won’t look as good as having autopay, a credit card, and a personal loan. The more varied your combination of credits, the higher this part of your score will be.
New credit (10%)
Imagine lending $1,000 to a friend, only to learn that the friend immediately went out and borrowed $1,000 from three other people. You would be right to worry that the friend doesn’t have enough money to repay all the loans. The same is true with your credit score. If you’ve recently applied for several loans or new credit cards, it makes creditors nervous about how much credit you’re willing to accept. The frequency with which you have applied for new credit enters into the calculation of this part of your credit file.
The benefit of understanding what’s happening to your FICO® score is how it empowers you to make positive changes. For example, since you know that payment history accounts for 35% of your total score, you can be extra careful that all payments are made on time. And since you know that 30% of your score is based on the amount you owe, you can focus on reducing your balances.